Suppose a government is established in a country where none previously existed.

Question

Suppose a government is established in a country where none previously existed. The government spends 80, financed by borrowing, to provide public services. If autonomous consumption plus investment is 210 and the marginal propensity to consume MPC = 0.8, what are the equilibrium real GDP values before and after the government is established?

a) What is the equilibrium real GDP value before the government is established?

Y0 =

b) What is the equilibrium real GDP value after the government is established?

Y1 =

Explanation / Answer

We can calculate the fiscal multiplier as 1/(1-MPC). Let's call this F. F=1/(1-0.8) F=1/0.2 F=5 Before the government was formed, GDP=210 After the government is formed, GDP=210+80*5=610

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.